The Downside of Working in PE/HF

This post was originally posted on WSO on 5/24/20 by user @jman.

When you're younger, it's very easy to say I want to do IB here, PE here, then b-school, PE or HF or whatever. That's fine but once you get past that ~6-year mark, life and career trajectory are not always so straightforward. That's just the reality of it.

Everyone likes to talk about how great PE is or the upside of HFs. But what people don't talk about is the downside. Let's not even talk about the top percentile that gets the jobs at the top funds, because the upside there is well understood. Nobody needs to spell out the math – if you're a VP/Principal at a megafund or upper MM with a path to partner – we know it's good.

How many people is that though? When you think about the funnel to get there and how many "new" spots are created at the VP level (i.e. if you weren't a pre-MBA at that shop and were an external hire) and then how many of those firms actually have room for said VPs to make partner? It is a small number. So what happens to everyone else?

Let's say you have to go down market and you join a smaller firm. Couple hundred million of AUM, maybe less. 1 or 2 funds. Invests in the middle or lower market. "Operational and sector expertise" "Partnering with great management teams" "Investing in good businesses". You make $400-$600k. Get 1-2m of carry dollars at work. Assume 2x MOIC. Oh nevermind, turns out we had a big dud in our portfolio. That 2x is now 1.25x or 1x. Oh wait, now we can't raise fund 2 or fund 3. Oh wait, now we're managing a zombie portfolio for 10 years. Oh wait, so my carry isn't worth much but I have a decent cash comp. Oh wait, I want to get out but now I'm 35+ and the reputation of my fund is not as good as what it used to be. Let's lateral! Oh wait, I can't find a good lateral spot because there aren't many to begin with at a principal level and I'm competing with people from bigger shops going down market (maybe they can't move up, there's no room, didn't work out, move to a new geography, whatever) and oh by the way, their fund isn't on wind-down mode.

So then what? You go down market or you go corporate. Maybe you roll the dice again at another similar fund setup. Maybe you have a strong network and get lucky and land something great. Who knows? Maybe you go in-house and can be VP of corp dev somewhere or a senior manager. Likely taking a 20-30% pay cut if not more. And then it's a slow grind upwards to climb the corporate ladder. Maybe you get lucky and join a company with equity that compounds 25% per year - fantastic! Suddenly the comp differential isn't as great. Maybe 2 years later a global pandemic hits and suddenly you get laid off on a company-wide zoom call.

The point of all this is that it's just really hard to say. What if you became a PM at a hedge fund and had 2 good years and pulled in 10m? But your career was over after that. Maybe you're 35-40 at that point. Compare that to the downside PE scenario and maybe it would've taken you 15-20 years to make that same amount...

I can paint a similar downside picture for HF roles as well. The downside scenario in HF is probably worse than the PE one. But if the focus is on the downside, maybe the answer is this is the wrong career field for that person and that person is better off finding a field where the focus can be on the upside.

That's why I think ultimately it comes down to your interest, strengths, opportunities and risk tolerance. Not everything is going to be linear but if you are good at something and are passionate about it, that will maximize the probabilities for success and having attractive opportunities.

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